ROYAL BANK OF CANADA HOLDINGS (U.K.) LIMITED PILLAR 3 DISCLOSURE FOR THE YEAR ENDED 31 OCTOBER 2017
Table of Contents 1.0 Overview... 1 1.1 Business Profile... 1 1.2 Basis and Frequency of Disclosures... 2 1.3 Location and Verification... 2 1.4 Risk Governance... 2 1.5 Regulatory Capital Management... 3 2.0 Risk Governance... 4 2.1 Accountability Structure... 4 2.1.1 Key Operating Entities... 6 2.1.2 Board of Directors... 6 2.1.3 Wealth Management International Operating Committee (WMIOC)... 7 2.1.4 Fiduciary Services Management Committee (FSMC)... 9 2.1.5 WMI RACC... 9 2.1.6 WMI Asset and Liability Committee (ALCO)... 9 2.1.7 WMI Investment Product Committee (WMIIPC)... 10 2.1.8 WMI High Risk Business (HRB) and Politically Exposed Persons (PEP) Committee... 10 2.1.9 WMI Governance and Control Committee (GCC)... 10 2.1.10 WMI New Business Committee (NBC)... 10 2.2 Risk Management and Control Framework... 10 2.2.1 Aligning Risk Management with Capital Management... 11 2.2.2 Three Lines of Defence Model... 11 2.2.3 Risk Appetite... 12 2.2.4 Risk Policy Management... 12 2.2.5 Capital Planning... 13 3.0 Own Funds... 14 3.1 Overview of Own Funds... 14 4.0 Capital Requirements... 17 5.0 Credit Risk... 18 5.1 Definition of Credit Risk... 18 5.2 Governance and Framework... 18 5.3 Credit Risk Profile... 18 5.4 Credit Risk Adjustments... 18 5.5 Counterparty Credit Risk... 19 5.6 Wrong-Way Risk Exposures... 19 5.7 Use of External Credit Assessment Institutions... 19 6.0 Market Risk... 20 6.1 Definition of Market Risk... 20 6.2 Governance and Framework... 20 6.3 Risk Profile... 20 7.0 Liquidity Risk... 21 7.1 Definitions of Liquidity Risk... 21 7.2 Governance and Framework... 21 7.3 Risk Profile... 21 8.0 Operational Risk... 22 8.1 Definitions Operational Risk... 22 8.2 Governance and Framework... 22 8.3 Risk Profile... 22 9.0 Remuneration... 24 9.1 Constitution and Activities of the UKHRC... 24 9.2 Criteria for the Identification of Material Risk Takers... 25 9.3 Design and Structure of Compensation for Material Risk Takers... 26 9.4 The Link between Pay and Performance for Material Risk Takers... 28 9.5 Disclosures on Remuneration... 30 10.0 Appendices... 32 10.1 Appendix 1: Board Membership... 32 10.2 Appendix 2: Governance Committees... 34 New Business Committees... 34 Monthly... 34 10.3 Appendix 3: Regulatory Capital Calculation Methods... 34
List of Tables Table 1: Distribution of Risk-weighted amount... 3 Figure 2: Governance Structure... 4 Figure 3: GAM UK Corporate Governance Framework... 5 Table 4: RBC HUK Capitalisation of Risk... 11 Table 5: Full reconciliation of own funds items to unaudited consolidated financial statements... 14 Table 6: Transitional own funds disclosure... 15 Table 7: Capital instruments main features table... 16 Table 8: Risk exposure amount by risk type and calculation approach adopted... 17 Table 9: Risk exposure amounts by banking and trading activities... 18 Table 10: Market risk by risk type... 20 Table 11: Aggregate remuneration awarded during the financial year to MRTs... 30 Table 12: Deferred Remuneration for MRTs... 31
1.0 Overview 1.1 Business Profile Royal Bank of Canada Holdings (U.K.) Limited ( RBC HUK or the Company ) is a holding company registered in England and Wales. The Company, which is a subsidiary of Royal Bank of Canada (RBC), a company registered in Canada, acts as a holding company for select activities across RBC Wealth Management and RBC Global Asset Management entities in the UK. Its subsidiaries provide a range of investment and other financial services, primarily in the United Kingdom, as part of the RBC Wealth Management International business. RBC HUK has three main regulated entities, one active directly wholly-owned subsidiary and two inactive directly wholly-owned subsidiaries, as follows: Royal Bank of Canada Investment Management (U.K.) Limited ( RBIM UK ), a key operating company, domiciled in the United Kingdom, incorporated on 20 April 1990. RBIM UK s business is to provide a full range of discretionary and advisory investment management services primarily to private clients, trusts, funds, companies and institutions. Under the FCA rules the company is categorized as an IFPRU 125K Limited Licence Firm (FCA FRN 146504). Royal Bank of Canada Investment Management (USA) Limited ( RBIM USA ) is a company domiciled and incorporated in the United Kingdom on 5 March 1997 and is a wholly owned subsidiary of Royal Bank of Canada Investment Management (U.K.) Limited. It was formed to provide a full range of discretionary and advisory investment management services to US resident private clients and Trusts. Under the FCA rules the company is categorized as an IFPRU 125K Limited Licence Firm (FCA FRN 186618). RBC Global Asset Management (UK) Limited ( GAM UK ) is a company domiciled in the United Kingdom. GAM UK, formerly RBC Asset Management UK Limited, was incorporated as a private company on 9 October 1998 under the name of De Facto 742 Limited. On 18 June 2013, the Company name was changed to RBC Global Asset Management (UK) Limited from RBC Asset Management UK Limited. Under the FCA rules the company is categorized as a BIPRU 50K Limited Licence Firm (FCA FRN 189154). Royal Bank of Canada Trust Corporation Limited ( RBC Trust Co ) was incorporated in England on 14 May 1965 and is also domiciled in the United Kingdom. The principal activity of RBC Trust Co is Trustee and Trust Administration services. RBC Trust Co. is a non-regulated company. Non-regulated entities are Royal Bank of Canada Trust Corporation Limited (active), RBC Pensions Trustees Limited (dormant) and Montco Nominees Limited (dormant). The legal structure of RBC HUK showing its wholly owned subsidiaries is represented below: Royal Bank of Canada Holdings (U.K.) Limited Holding company Regulated entity Non-regulated entity Montco Nominees Limited RBC Pensions Trustees Limited RBC Global Asset Management (UK) Limited Royal Bank of Canada Investment Management (UK) Limited Royal Bank of Canada Trust Corporation Limited Royal Bank of Canada Investment Management (USA) Limited - 1 -
1.2 Basis and Frequency of Disclosures Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It intended to strengthen global capital and liquidity rules with the goal of improving the banking sector s ability to absorb shocks arising from the financial and economic stress, thus reducing the risk of spill over from the financial sector to the real economy. The EU implemented the Basel III framework through the new Capital Requirements Directive and Regulation (CRD IV package). Further UK implementation is by way of the PRA s Policy Statement PS7/13, effective from 1 January 2014. Basel III capital adequacy framework comprises three complementary pillars: Pillar 1 establishes rules for the calculation of minimum capital for Credit, Market, Operational Risk and Leverage (capital adequacy requirements). Pillar 2 is an internal discipline to evaluate the adequacy of the regulatory capital requirement under Pillar 1 and other non-pillar 1 risks. This pillar requires the PRA to undertake a supervisory review to assess the robustness of the regulated entity's internal assessment (risk management and supervision). Pillar 3 complements the other pillars and affects market discipline through public disclosure. Expanded disclosure about capital and risk enables interested parties to better understand the risk profile of individual banks and companies and to make comparisons (market discipline). The aim of Pillar 3 is to publish a set of disclosures which allow market participants to assess key information on the capital condition, risk exposures and risk assessment process. The information disclosed are prepared in accordance with the disclosure requirements set out in Part Eight of the Capital Requirement Regulation (CRR). The disclosures may differ from similar information in the Company s financial statements for the year ended 31 October 2017, which are prepared in accordance with International Financial Reporting Standards (IFRS). Therefore, the information in these disclosures may not be directly comparable with that information. RBC HUK updates these disclosures on an annually basis as at its financial year end of 31 October. The Company will assess the need to publish some or all disclosures more frequently in the light of the relevant market and business conditions. 1.3 Location and Verification These disclosures have been reviewed and approved by the Company s Board of Directors. These disclosures will be published on the Company s public website: http://www.rbcwealthmanagement.com/gb/en/terms-and-conditions. 1.4 Risk Governance Foundational to RBC approach to subsidiary governance is collaboration across all businesses and platforms. As a result, RBC s corporate governance is underpinned by a robust corporate governance framework ( framework ), established for the entire business. The framework provides a structured approach for risk identification and assessment; risk monitoring and reporting; and risk control and mitigation for the varying layers of management and staff within the company. The framework s effectiveness is further enhanced by established terms of reference, which provide clear reporting lines and escalation of issues to legal entity boards and other key RBC Committees. Approval and adoption of the framework enables the Business Head and Operating Committee to provide strategic direction, leadership and executive oversight through positive advice and counsel recommendations to the regional Wealth Management International ( WMI ) businesses and legal entity Boards, subject to local regulatory and legal requirements. Aside from GAM UK, the holding - 2 -
and operating companies Boards, which carry the ultimate regulatory responsibility, are represented on the Wealth Management International Operating Committee by senior executive directors. In addition to its Board, the GAM UK business is also overseen and monitored through a platformwide risk management framework with day-to-day risk management activities undertaken by local staff. 1.5 Regulatory Capital Management As at 31 October 2017, the Company was adequately capitalised with a Common Equity Tier 1 ratio and Total Capital ratio of 91.6%. The total capital surplus was 56.7 million over the minimum capital requirement 1. This is in line with the risk tolerance set by the Company s Board. The table below illustrates the distribution of the RBC HUK s risk profile. Table 1: Distribution of Risk-weighted amount As at 31 October 2017 Riskweighted Exposure '000 a. Risk-weighted exposure amounts for credit and counterparty credit Banking book credit risk 21,116 Counterparty credit risk - 21,116 b. Risk-weighted exposure amount for market risk Foreign exchange risk 3,376 3,376 c. Total Credit and Market Risk (a+b) 24,492 d. Risk-weighted exposure amount for fixed overhead requirement 74,535 Total risk-weighted exposures (higher of c and d) 74,535 1 CET 1 ratio and total capital surplus are calculated in accordance with the transitional provisions. - 3 -
2.0 Risk Governance 2.1 Accountability Structure Risk management at RBC is carried out at the subsidiary level as part of a group-wide approach. Within this structure, subsidiary level Boards are responsible for managing the risk management frameworks for their business. Certain day-to-day risk management tasks are delegated to the risk teams within the business. However, each subsidiary Board is ultimately responsible for the following key activities: Ensuring that policies and procedures for risk management are created and maintained by the business; Embedding a strong risk culture in the business by setting the right tone at the top, from the Board of Directors to senior management, and across to all employees; Developing and maintaining the risk appetite for the business; Implementing an effective risk management framework to manage the risks of the business within the defined risk appetite; Monitoring all material risk exposures, reviewing and approving any risk exceptions and ensuring that any breaches of risk appetite are remediated and/or escalated; Reviewing and challenging the findings from the annual Internal Capital Adequacy Assessment Process ( ICAAP ) and approving the ICAAP report before submission to the regulator; and Reviewing, on an ongoing basis, emerging risks and changes in legal, regulatory, and accounting requirements and their implications for risk management within the business lines. The entity Board reviews a quarterly risk report which provides an overview of the profile and trends for each material risk facing the wealth management subsidiaries, including an assessment of any risk concentrations within these. The risk profile of each entity is reviewed in greater detail by regional and/or platform-wide risk committees. Figure 2 below depicts the current Wealth Management International (WMI) management committee structure (excluding GAM UK): Figure 2: Governance Structure - 4 -
The Board of GAM UK has primary responsibility for the overall governance of GAM UK and has put in place experienced and capable individuals in senior management positions who are responsible for the key business functions and who report to the Board on issues of concern and make recommendations for improvement in relation to their functions. GAM UK is a wholly owned subsidiary of RBC HUK which itself is a wholly owned subsidiary of Royal Bank of Canada. GAM UK is one of the subsidiaries overseen by the Global Asset Management Executive Committee that provides group level oversight of asset management business and risk management activities. GAM UK is also overseen locally by a Management Committee comprised of the CEO, senior management and functional heads. The objectives of the Management Committee are to constructively challenge, assist and advise the Chief Executive Officer of GAM UK regarding his responsibility to manage the business of GAM UK and will provide assistance and advice inter alia in relation to: Developing and implementing business initiatives to accelerate the growth of the business and to monitor the effectiveness of such initiatives as well as resolving any issues that are holding back business development initiatives and plans; Ensuring GAM UK successfully acquires and services institutional clients in its target markets; Organizing and developing the support and business practices necessary to ensure that UK managed products are properly operated, supported and made available for sale in relevant markets in which RBC operates; Ensuring assets sourced from Canadian and US clients are appropriately managed and serviced to best in class standards; Approving any product development initiatives based on recommendations from the GAM UK New Product Initiatives Committee; Ensuring that the financial results of GAM UK, including annual budgets and multi-year projection, are properly compiled on a timely basis and are sufficient to enable GAM UK to be properly monitored and reported; and Ensuring that the appropriate level of Compliance, Legal and Risk resources are directed to the business so that all regulatory and legal issues relevant to GAM UK are appropriately dealt with. The GAM UK Management Committee is supported by New Product Idea Committee, GAM UK Operations Committee and the Trade Management Oversight Committee. Figure 3 below depicts the current GAM UK Corporate Governance Framework: Figure 3: GAM UK Corporate Governance Framework - 5 -
2.1.1 Key Operating Entities UK Royal Bank of Canada Holdings (UK) Limited Investment Management Royal Bank of Canada Investment Management (U.K.) Limited Royal Bank of Canada Investment Management (USA) Limited Asset Management RBC Global Asset Management (UK) Limited 2.1.2 Board of Directors Under the Board Mandate (which sets out the role, duties, collective responsibilities and operation of the Board), the Directors are responsible for the overall stewardship of the Company in its capacity as the supervisory Board of the RBC HUK Group. In this capacity, the Directors are fundamentally responsible for the oversight of the RBC HUK Group s management and are required to act in the way they consider, in good faith, would be most likely to promote the success of the RBC HUK Group for the benefit of its ultimate Shareholder, RBC, as a whole, by applying skill, judgement and expertise to issues while complying with legal processes of corporate governance. The Board of RBC HUK monitors and assesses effectiveness of controls against changing regulatory expectations. Through its governance structures and controls, the Board has a line-of-sight on key risks and operational controls across the firm through monitoring the internal and external audit issues, and capital adequacy requirements of the RBC HUK Group. The Board of RBC HUK also provides positive advice and counsel to the Boards of the RBC HUK Group in their role on matters relating to Fiduciary, Strategic and Supervisory matters. The Board is responsible for overseeing the strategic risk direction and risk appetite for the RBC HUK Group. This includes: Maintaining a direct line-of-sight over key current and emerging risks across the RBC HUK Group; Ensuring that an effective systems and controls framework is in place for business, risk and capital management; Ensuring that the financial objectives are aligned with risk appetite and objectives; and Monitoring and assessing the effectiveness of controls against changing regulatory expectations. Recruitment Policy for Board Members Appointments to the Board of the Company follow a formal procedure. As the Company is a wholly owned subsidiary within the RBC Group and not a listed public company, proposals for appointments to the Board, following consultation with the Chair, are made to the RBC Subsidiary Governance Office, in accordance with the relevant procedures set out in the RBC Group policy pertaining to the governance of subsidiary companies (SGO Policy). As part of the selection process prior to proposals being considered by the Board, individuals are interviewed in accordance with applicable corporate governance practices. In accordance with the SGO Policy, all proposals submitted to the Board consider the collective competence of the Board to ensure that there is sufficient experience and technical expertise and a balance of executives and non-executives to ensure that the Board are, at all times, adequately staffed and compliant with applicable legal and/or regulatory requirements and will take account of the Company s diversity policy. Proposals to the Board also reflect if the individual: Is competent to fill and is fit and proper to carry out that role; Possesses sufficient knowledge, skills and experience to perform the duties of a Director; Is willing and able to commit sufficient time to discharge his or her responsibilities to the Company. - 6 -
Aligned with RBC s core values, including "Diversity and Inclusion", the Board recognizes the benefits of promoting diversity, both within the Company and at Board level. Diverse perspectives linked in common purpose contribute to innovation and growth for RBC. The relevant background and professional experience of the Directors of the Board are provided in Appendix 1. 2.1.3 Wealth Management International Operating Committee (WMIOC) WMIOC is a top level management committee in the Wealth Management International WMI region established to enable the Head of WMI to achieve effective oversight and management of business strategies, performance, and risk as well as the determination of new business and local human resourcing, compliance and risk policies across WMI via the Key Operating Entities (excluding GAM UK) and establish a robust and effective corporate governance framework for WMI by the provision of positive advice and counsel. Any escalation will go to Wealth Management Operating Committee (WMOC). SCOPE WMIOC is a key management forum to enable the effective oversight and management of business strategies, performance, and risk as well as the determination of new business across WMI via the legal entities listed in section 2.1.1. WMIOC will: Develop and implement strategy across WMI to be consistent with the overarching strategy of RBC and RBC Wealth Management and in conjunction with the respective Key Operating Entities (excluding GAM UK); Facilitate cross-business and cross functional discussion and consultation at Senior Management level relative to the business conducted by WMI; Allow members of WMIOC to inform each other of key decisions and material developments in their businesses or functional groups; Provide positive advice & counsel and recommendations to Key Operating Entities (excluding GAM UK) within WMI, as appropriate; Provide positive advice & counsel and recommendations to the key sub-committees; Assist the appointed individual with Executive oversight of WMI ( Head of WMI ) to discharge his personal management responsibilities; Assist the Head of WMI to decide whether to progress matters to a formal decision at respective Key Operating Entity Boards; and Assist the Head of WMI to decide whether to progress matters to a formal recommendation at RBC Group level, where applicable. AUTHORITY WMIOC is a committee established under the specific authority of RBC Holdings (Channel Islands) Limited, RBC HUK and the Key Operating Entity Boards (together the Delegating Boards ) with delegated authority to make collective recommendations in relation to strategy for the operations conducted by the Key Operating Entities (excluding GAM UK). The Committee will also consider positive advice and counsel from the WMOC and other RBC committees. RESPONSIBILITIES The Committee s responsibility is to develop, recommend and implement the strategic direction of the WMI operations and to measure performance against these objectives. Specific responsibilities will include: Strategy Vision Operating Model Principles - 7 -
Business strategies New business/initiatives Resource allocation Portfolio recommendations acquisitions, investments, divestments and partnerships Five-year business plan Risk profile/appetite Performance Financial performance and goals Risk and control environment Leadership, talent management and career management Succession Planning Governance Setting governance principles, framework and culture Transformation Progress on milestones and targets Cost and revenue transformations Cross enterprise issue resolution New Business Review and recommend all new product service proposals for onward risk rating by the local New Business Committee (NBC); For High Residual Risk rated NBC Solutions that have also receive positive Advice and Counsel from WMI Risk and Compliance Committee (WMI RACC) either provide positive Advice and Counsel or Decline the Solution as appropriate; On provision of positive Advice and Counsel for High Risk Solutions, escalate to WMOC and PRC for Advice and Counsel, and Provide formal response of recommendations to the NBC. The Committee shall consider the following matters: Receive updates from RBC Group and WM Operating Committee; Develop and recommend the annual Strategic Plan to Key Operating Entity boards; Review financial results; Provide positive Advice and Counsel regarding the WMI Risk Appetite; Ensure alignment of WMI strategy with other areas of RBC and WM; Discuss overall business planning, review and discuss progress of strategic direction and initiatives of WMI; Review and consider key performance measures and targets relative to the WMI operations; Consider and agree key projects across businesses and functions; Consider and adopt decisions made by Central Functional Teams; Review and recommend, or approve as appropriate, local policies to be implemented including but not limited to those related to Corporate Social Responsibility, employee social related activities and cost efficiency initiatives; Receive and consider updates on Operations and Technology matters; Receive and consider updates on key Audit and Regulatory matters; Receive and consider updates on key Risk and Compliance issues; Propose matters for consideration/approval by the Key Operating Entity Boards or WMOC as appropriate; and Consider significant or exceptional ad hoc items from senior management as appropriate. - 8 -
ESCALATION The Head of WMI will report and escalate key recommendations and issues to the Delegating Boards, as appropriate, on a quarterly basis. The Head of WMI will also escalate any significant matters to the Wealth Management OC, as appropriate. 2.1.4 Fiduciary Services Management Committee (FSMC) FSMC is a sub-committee which provides strategic oversight and direction to the fiduciary businesses, to ensure all activities align to WMI strategy. The committee acts as the point of escalation for key audit, regulatory and risk matters via the provision of positive advice and counsel to the WMI OC, to the various subsidiary management and operating committees established under the WMI Fiduciary Services Governance framework and to the key operating entities. 2.1.5 WMI RACC WMI RACC is established to provide effective oversight and review of risk and compliance matters for the WMI businesses within the Key Operating Entities (excluding GAM UK). The WMI RACC is responsible for ensuring business, and operational strategies are consistent with risk appetite, and that appropriate actions are taken in cases where risk profile exceeds risk appetite. The Committee will be responsible for ensuring that the necessary enterprise risk framework is in place. The enterprise risk framework should include policies, monitoring, reporting and a control infrastructure that is commensurate with the nature and materiality of the risks the businesses are exposed to and aligns to RBC s Enterprise Risk Management Framework. The Committee s primary responsibility is to provide effective understanding and oversight of risk for WMI including but not limited to: Development and embedding of risk frameworks and policies for all material risks; Monitoring and reporting risk profile and ensuring effective management of key risks; Review regulatory compliance matters, including conflicts of interest, complaints and Client Assets and Client Money (CASS) related matters; Provide advice and counsel to the WMI businesses regarding referrals from the High-Risk Business, Client and PEP committee and the BI Fiduciary Higher Risk Business Committee, and any other reputational risks as necessary; Provide advice and counsel, in respect of clients classified as H2 or H3; Provide advice and counsel, in respect of PEPs; and Provide advice and counsel, in respect of High-Risk third party introducers. 2.1.6 WMI Asset and Liability Committee (ALCO) ALCO is responsible for oversight and monitoring of all matters relating to the financial resources of WMI including the management of balance sheet, capital position, funding and liquidity, and structural banking book interest rate risk. Specifically, ALCO s responsibilities in relation to these matters include: Approval of limits, controls and policies; Review of the current and projected positions relative to agreed limits and any regulatory constraints; Oversight of the preparation and production of the annual Internal Capital Adequacy Assessment Process and Internal Liquidity Adequacy Assessment documents for RBC HUK; and Ensuring business and operational strategies are consistent with appetite, in the context of balance sheet and funding. ALCO is comprised of senior management from the Business, Risk, Finance, and Corporate Treasury functions. - 9 -
2.1.7 WMI Investment Product Committee (WMIIPC) WMIIPC is responsible for the development and execution of investment strategies for the WMI platform and the ongoing oversight of investment performance. Specific responsibilities include active management of the: Product offerings, Investments white list Fund Manager selection DIM models 2.1.8 WMI High Risk Business (HRB) and Politically Exposed Persons (PEP) Committee Reviews and approves all proposals to take on Politically Exposed and High Risk Clients and business, ensuring compliance with local legal and regulatory requirements. Significant risk proposals are escalated to the WMI RACC; which in turn reports to the WMIOC. Committee makes general recommendations concerning financial crime risk management best practices in WMI. 2.1.9 WMI Governance and Control Committee (GCC) GCC is a key management forum to assist in the effective implementation, oversight and review of RBC WMI strategy. This Committee is chaired by the WMI COO with representation from key business and functional groups within WMI. This forum is responsible for local operational management, compliance and regulatory activities, employee engagement and morale and all other local activities. They are also responsible for key Operations and Technology and functional matters within, including review and recommendation of projects and ongoing oversight related to implementation and execution. 2.1.10 WMI New Business Committee (NBC) This forum is responsible for the review, evaluation and risk-assessment of solutions, services and products. The forum provides the Board with a robust review and recommendation process that fully consider all associated risks, while striving to facilitate business opportunities; and determining whether WMI has the required infrastructure to support any new or significantly different solutions. Information on frequency of committee meetings is included in Appendix 2. 2.2 Risk Management and Control Framework Risk management at RBC is carried out at the subsidiary level as part of a group-wide approach. Within this structure, subsidiary level Boards are responsible for managing the risk management frameworks for their business. Certain day-to-day risk management tasks are delegated to the risk teams within the business. However, each subsidiary Board is ultimately responsible for the following key activities: Ensuring that policies and procedures for risk management are created and maintained by the business; Embedding a strong risk culture in the business by setting the right tone at the top, from the Board of Directors to senior management, and across to all employees; Developing and maintaining the risk appetite for the business; Implementing an effective risk management framework to manage the risks of the business within the defined risk appetite; Monitoring all material risk exposures, reviewing and approving any risk exceptions and ensuring that any breaches of risk appetite are remediated and/or escalated; - 10 -
Reviewing and challenging the findings from the annual ICAAP and approving the ICAAP report before submission to the regulator; and Reviewing, on an ongoing basis, emerging risks and changes in legal, regulatory, and accounting requirements and their implications for risk management within the business lines. Entity Boards review a Quarterly Risk report which provides an overview of the profile and trends for each material risk facing the wealth management subsidiaries including an assessment of any risk concentrations within these. The risk profile of each entity is reviewed in greater detail by regional and/or platform-wide risk committees. 2.2.1 Aligning Risk Management with Capital Management The subsidiary-level Boards manage risk with the aim of maximising the overall value of the company for clients, shareholders and employees. RBC defines risk as the potential for loss or an undesirable outcome with respect to volatility of actual earnings in relation to expected earnings, capital adequacy or liquidity. This definition includes risks with a direct and immediate impact such as loss of key clients, as well as risks that have an indirect or longer term impact such as a failure to comply with regulatory requirements. The material entities for the purpose of this report, GAM UK and RBIM UK provide asset and wealth management services to clients principally located in Canada, Europe and the USA. The primary risks relevant for these entities are Operational risk (including Regulatory Compliance risk), Credit risk, Market risk, Business risk, Group risk, and Liquidity risk. The profile and capital requirement consideration for each of these risks is described under the relevant headings below. Based on the risk profile, the Board decides on the appropriate risk management tools for each category of risk. Robust risk management policies, internal controls, and effective monitoring and reporting procedures are in place to mitigate the primary risks. The table below shows the primary risk categories, and how these are managed and capitalised: Table 4: RBC HUK Capitalisation of Risk Risk Category Risk Managed Through Risk Capitalised Through Operational risk WMI Operational Risk Framework GAM UK Risk & Control Framework Internal Capital Framework Credit risk WM Finance debtor and cash management Regulatory and Internal procedures Capital Frameworks Financial arrangements within client agreements Market risk RBC Group Risk Management Framework Regulatory and Internal Capital Frameworks Business risk Entity level Boards ICAAP Wind down analysis Group risk RBC Group Risk Management Framework ICAAP Wind down analysis Liquidity risk Entity level Liquidity Management Policies ICAAP Wind down analysis Other risks 1 Various policy documents, including RBC Code of Conduct, RBC Taxation risk policy, etc. Not capitalised 1 Other risks include Legal, Reputation, Regulatory Compliance, and Tax risk. 2.2.2 Three Lines of Defence Model The Company has implemented control frameworks built on the principles of the three Lines of Defence model: The first Line of Defence is provided by the direct business and embedded support functions such as the Client relationship managers. The primary responsibility of the first Line of Defence is risk identification, assessment, mitigation, control and reporting in accordance with established RBC - 11 -
risk policies. They are accountable for aligning business and operational strategies with corporate risk culture and risk appetite. The second Line of Defence comprises the areas to which the Board has delegated the day-to-day oversight functions, in particular the CEOs. The Second Line of Defence is accountable for establishing the company level risk management frameworks, and provide risk guidance, provide oversight for the effectiveness of First Line risk management practices; and monitoring and independently reporting on the level of risk against the established appetite. The third Line of Defence is provided through internal audit services. The Third Line provides independent objective assurance on the effectiveness of risk management policies, processes and practices in all areas of the company. Further assurance is provided by the firm s external auditor. 2.2.3 Risk Appetite Risk Appetite is defined as the amount and type of risk that the Company is willing to accept in the pursuit of its business objectives. The overall objective of the Company s Risk Appetite Framework is to protect the Company from unacceptable levels of risk while supporting and enabling the firm s overall business strategy and goals. The Framework provides details on the Company s risk appetite principles, constraints and metrics and is approved annually by the Boards. 2.2.4 Risk Policy Management The Company has implemented RBC policies and processes in the context of the Company s Risk Policy Management Requirements to support the assessment and management of risks. The Company regularly reviews policies and controls to ensure continued effectiveness and alignment with relevant laws and regulations. To ensure it is operating with integrity, the Company adheres to a number of other principles, codes and policies including the RBC Code of Conduct, which governs the behaviour of its employees and informs how the Company conducts its business operations. Where necessary, the Company adapts the RBC Enterprise wide policies to ensure compliance with local legal and regulatory requirements and expectations. The European CRO has the responsibility of ensuring these policies are consistent with: Regulatory requirements; Relevant RBC policies; and Higher and lower level policy documents within the risk policy architecture. The Company s Risk Policy Management Requirements document adopts the following three-tier hierarchy for approving frameworks, policies, standing orders, standards and procedures (collectively referred to as policy documents): Level 1 policy documents include overarching frameworks and policies that outline the Company s regulatory requirements and risk governance. These are approved by WMI RACC or ALCO, both Board Committees. Level 2 policy documents include risk-specific frameworks and policies that lay the foundations for how each risk (and any sub-risk) is managed. These are approved by Management Committees. Level 3 policy documents include those that are put in place to support Level 2 policy documents. These are approved by either Management Committees or Heads of Risk. Capital adequacy and capital ratios measures are monitored daily against internal thresholds by the Regulatory Reporting team in the Finance department. Any breaches are escalated immediately. ALCO also receives monthly reports detailing current capital adequacy position, while the Board and WMI RACC are updated on a quarterly basis. Analysis, monitoring and reporting of risk profiles and performance against risk appetite limits and tolerances are conducted by the relevant risk functions. Results are reported to the ERC at least quarterly, with management committees updated on a more regular basis. - 12 -
Stress testing and reverse stress testing are conducted on at least an annual basis. The analysis is undertaken more frequently if deemed necessary as a result of changing business strategy, results or market conditions. 2.2.5 Capital Planning RBC HUK and its subsidiaries undertake an annual ICAAP to ensure that the business strategy and planning translate into adequate capital levels over internal and external capital minima, and identify periods where capital buffer becomes tight so that corrective action can be undertaken in advance. This also includes reviewing the capital levels against risk appetite to ensure that the business strategy and planned capital levels remain in line with the risk appetite. The capital plan is derived from the base case business plan and takes into account changes to business forecasts, market conditions and other developments, such as accounting or regulatory changes that may impact capital requirements. The base case capital plan also forms the basis for stress testing analysis. Stressing the capital plans, through use of a range of severe but plausible down-turn scenarios, enables RBC HUK to test the strength of its capital base and also to consider mitigating actions in advance in order to maintain overall financial adequacy in periods of stress. The capital plan is updated on a periodic basis to reflect actual operating results, updated Profit and Loss forecasts and any changes in business strategies. Additionally, the Finance function evaluates the capital impact of new (large) transactions and products and advises senior management accordingly. The ICAAP is an annual process managed by the Regulatory Reporting, Europe function reporting into the Chief Finance Officer, Europe. The Board of RBC HUK delegated the responsibility for developing and overseeing all aspects of the ICAAP and subsidiary ICAAPs, including accurate documentation of key findings from the risk and capital requirements assessment, to individual Board and Steering Committees for each subsidiary. The Committee for each subsidiary consists of senior management from Group Risk Management, Finance, and Operational Risk functions, as well as business representatives. The groundwork, workshop analysis, and drafting of the ICAAP report for the subsidiaries of RBC HUK (GAM UK and RBIM UK) was performed by the ICAAP Working Group for each subsidiary which reported in to the respective ICAAP Steering Committee. The Board provides final review and approval of the ICAAP report. As at 31 October 2017, RBC HUK has sufficient capital resources to meet both its Pillar 1 and Pillar 2 capital requirements. - 13 -
3.0 Own Funds 3.1 Overview of Own Funds As at 31 October 2017, the Company had total own funds of 68.1 million, which comprises of solely Common Equity Tier 1 Capital. A full reconciliation of own funds items to unaudited consolidated financial statements are shown in the table below. Table 5: Full reconciliation of own funds items to unaudited consolidated financial statements Per Consolidated Statement of Changes In Equity '000 31 October 2017 Common shares 18,316 Capital reserves Capital reserves 22,293 Retained earnings Opening 4,781 Net profit 22,920 Retained earnings at 31 October 27,701 Total equity 68,310 Deductions of CET1 Capital Other intangible assets (240) Deferred tax liabilities associated to other intangible assets 48 Total CET1 deductions (192) Total Fully Loaded Tier 1 Capital 68,118 Additional Tier 1 Capital - Tier 2 Capital - Fully Loaded Own Funds 68,118-14 -
Table 6: Transitional own funds disclosure Common Equity Tier 1 capital: instruments and reserves 31 October 2017 '000 Prescribed residual amount Final CRD IV Capital instruments and the related share premium accounts 18,316-18,316 of which: Common shares 18,316-18,316 Retained earnings 27,701-27,701 Accumulated other comprehensive income (and any other reserves) 22,293-22,293 Common Equity Tier 1 (CET1) capital before regulatory adjustments 68,310-68,310 Common Equity Tier 1 (CET1) capital: regulatory adjustments Goodwill and Other intangible assets (net of related tax liability) (192) - (192) Total regulatory adjustments to Common Equity Tier 1 (CET1) (192) - (192) Common Equity Tier 1 (CET1) capital 68,118-68,118 Additional Tier 1 (AT1) capital - - - Tier 1 capital (T1 = CET1 + AT1) 68,118-68,118 Tier 2 (T2) capital - - - Total capital (TC = T1 + T2) 68,118-68,118 Total risk-weighted exposures 74,535 Capital ratios and buffers Common Equity Tier 1 ratio 91.4% Tier 1 ratio 91.4% Total capital ratio 91.4% Institution specific buffer requirement - of which: capital conservation buffer requirement - of which: countercyclical buffer requirement - of which: systemic risk buffer requirement - of which: Global Systemically Important Institution (G-SII) or Other Systemically Important Institution (O-SII) buffer - Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount) 83.4% Amounts below the thresholds for deduction (before risk-weighting) Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) - Direct and indirect holdings of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) - Deferred tax assets arising from temporary difference - Applicable caps on the inclusion of provisions in Tier 2 Credit risk adjustments included in T2 in respect of exposures subject to standardised approach (prior to the application of the cap) - Cap on inclusion of credit risk adjustments in T2 under standardised approach - Credit risk adjustments included in T2 in respect of exposures subject to internal ratingbased approach (prior to the application of the cap) - Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach - Capital instruments subject to phase-out arrangements (applicable between 1 Jan 2014 and 1 Jan 2022) - Current cap on CET1 instruments subject to phase-out arrangements - - Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) - - Current cap on AT1 instruments subject to phase-out arrangements - - Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) - - Current cap on T2 instruments subject to phase-out arrangements - - Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) - - 15 -
Table 7: Capital instruments main features table Capital instruments main features template Issuer Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement Governing law(s) of the instrument Regulatory treatment Common shares Royal Bank of Canada N/A English Transitional CRR rules Common Equity Tier 1 Post-transitional CRR rules Common Equity Tier 1 Eligible at solo/(sub-)consolidated/solo & (sub-)consolidated Solo Common Equity Tier 1 Instrument type (types to be specified by each jurisdiction) as published in Regulation (EU) No 575/2013 Article 28 Amount recognised in regulatory capital (currency in million, as of most recent reporting date) GBP 18.3m Nominal amount of instrument GBP 18.3m Issue price 100 per cent Redemption price 100 per cent of Nominal amount Accounting classification Equity Original date of issuance Wednesday, September 11, 1996 Perpetual or dated Perpetual Original maturity date No maturity Issuer call subject to prior supervisory approval No Optional call date, contingent call dates, and redemption amount N/A Subsequent call dates, if applicable Coupons / dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory (in terms of timing Fully discretionary, partially discretionary or mandatory (in terms of amount) Existence of step up or other incentive to redeem Non cumulative or cumulative Convertible or non-convertible If convertible, conversion trigger (s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into Write-down features If write-down, write-down trigger (s) If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Non-compliant transitioned features If yes, specify non-compliant features N/A' inserted if the question is not applicable N/A N/A N/A N/A Fully discretionary Fully discretionary No Non cumulative Non-convertible N/A N/A N/A N/A N/A N/A No N/A N/A N/A N/A N/A No N/A - 16 -
4.0 Capital Requirements Capital adequacy and capital ratios measured are monitored monthly against internal thresholds by the Finance department. Any breaches would be escalated immediately. In addition ALCO receives quarterly reports detailing capital requirements, while the Board are also updated on a quarterly basis. Analysis, monitoring and reporting of risk profiles and performance against risk appetite limits and tolerances are conducted by the relevant risk functions. As at 31 October 2017, the Company s minimum capital requirements are illustrated below, expressed in terms of risk-weighted exposure, as calculated by the approaches adopted by the Company to calculate the minimum capital resources requirements. Table 8: Risk exposure amount by risk type and calculation approach adopted As at 31 October 2017 Risk-weighted Exposure CET1 Capital requirement @ 4.5% Tier 1 Capital Requirement @ 6% Total Capital requirement @8% '000 a. Risk-weighted exposure amounts for credit and counterparty credit Calculated under the Standardised Approach Institutions 12,062 543 724 965 Corporates 7,311 329 439 585 19,373 872 1,162 1,550 b. Risk-weighted exposure amount for market risk Calculated under the Standardised Approach Foreign exchange risk 3,376 152 203 270 3,376 152 203 270 c. Total Credit Risk and Market Risk (a+b) 22,749 1,024 1,365 1,820 d. Risk-weighted exposure amount for fixed overhead requirements Calculated as per Article 97 of the CRR 74,535 3,354 4,472 5,963 Pillar 1 Capital Requirement (higher of c and d) 74,535 3,354 4,472 5,963 Surplus CET1 Capital Surplus over the minimum requirement 64,764 Surplus Tier1 Capital over the minimum requirement 63,646 Surplus Total Capital over the minimum requirement 62,155 Calculation methods for the capital requirements above are listed in Appendix 3. - 17 -
5.0 Credit Risk 5.1 Definition of Credit Risk Credit risk is the potential that counterparty will fail to meet its obligations in accordance with agreed terms, thus giving rise to a risk of loss of earnings or capital. The Credit risk capital requirement included in this report is based on the summation of the Credit risk capital required for the two material subsidiaries of RBC HUK, i.e. GAM UK and RBIM UK. 5.2 Governance and Framework GAM UK and RBIM UK have no appetite to pursue Credit risk as a way of earning additional shareholder returns. As an Investment Firm the group is not exposed to Banking Book Credit Risk and Trading Credit Risk. Policies and procedures exist to monitor and manage Credit and Counterparty risk exposures which arise out of day-to-day business activities. 5.3 Credit Risk Profile Cash at bank and fee receivables are the two sources of credit risk for the material subsidiaries of the RBC HUK Group. Client agreements determine if the fees are charged in advance or in arrears. Management fees are typically charged and collected on a quarterly basis although this may differ for some clients. Fees and other balances due from clients are reviewed by the Wealth Management Finance team on a regular basis; there is low credit risk associated with the fee accruals and historically there have been no cases of bad debts in relation to fees. Cash at bank is held in the name of RBC Holdings (U.K.) Ltd., RBC GAM (UK) Ltd. and RBIM (UK) Ltd. at the RBC bank subsidiaries in the UK and Channel Islands. With both banks, the agreements dictate that cash is payable on demand. Bank reconciliation procedures are in place as well as authorisation and approval controls over transfer of funds. RBC HUK s credit risk is derived from its investment activities. The table below indicates the riskweighted exposure amounts of credit and counterparty credit risk from this activity. Table 9: Risk exposure amounts by banking and trading activities As at 31 October 2016 '000 Banking Trading Total Risk-weighted exposure amounts for credit and counterparty credit Calculated under the Standardised Approach Institutions 12,062-12,062 Corporates 7,311-7,311 Total 19,373-19,373 5.4 Credit Risk Adjustments Credit risk adjustment is defined as the amount of specific loan provision for credit losses that has been recognised in its financial statements in accordance with the International Financial Reporting Standards (IFRS). The two regulated subsidiaries of the RBC HUK Group do not have a loan book and not licensed to offer credit solutions. Therefore Credit Risk Adjustments is not applicable for the RBC HUK Group. - 18 -